Liquidity refers to how easy it is to buy and sell an asset. The easier and faster it is to transact, the more liquid an asset is, and vice versa.
Stocks are among the world’s most liquid assets. Stocks trade in open markets where millions upon millions of people and companies buy and sell daily. Pricing is fast and efficient—unless you’re trading a gigantic lot of stocks, the price you see quoted is typically very near the price you’d get if you sold at that instant. Transactions are completed in the blink of an eye. While trades usually take three days to settle, most brokerage houses have systems to let you access cash sooner if need be.
Bonds, overall, are less liquid than stocks. They mostly trade over-the-counter, not on open exchanges, making trading more difficult, time-consuming, expensive and opaque. That said, asset liquidity varies by bond type.
Real estate is an illiquid asset. You can’t sell your home overnight and receive its market value. There is no place where you can find your exact home’s price ticking. And locality can greatly affect even structures’ values. It could take months (and potentially lots of haggling) to find a buyer. Once the deal is closed, the transaction sits in Escrow for weeks. There are also inspections, commissions and closing costs—time-consuming and costly.
Non-traded REITs are also illiquid assets. Unlike normal REITs, they aren’t bought and sold on exchanges. Their values aren’t transparent, making price discovery difficult on the secondary market, where buyers may be few and far between.
Annuities are illiquid. Even though many are invested in liquid assets like stocks and bonds, annuities are contracts with restrictive redemption terms, and if annuitized, may not be redeemable at all.
Other less liquid assets include private placements and partnerships, which have long lock-up periods and very limited redemption windows, limiting access to your money. Trading on the secondary market is often prohibited, the universe of buyers is small, and share values are typically determined by investment companies (usually venture capital funds), not the open market.